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Shriram Trans Fin.: Fall in NII causes profits to dip

Jul 24, 2012

Shriram Transport Finance (STFC) declared its results for the first quarter of the financial year 2011-13 (1QFY13) results. The institution's net interest income and profits dipped by 1.1% and 7.3% YoY respectively.

Performance summary

Net interest income falls 1.1% YoY in 1QFY13 despite a 13.3% growth in assets under management.

Net interest margins (on assets under management) contracts to 7.4%, from 7.6% in 1QFY12 on increased costs of funds.

Standalone net profit falls by 7.3% YoY in 1QFY13 on account of a fall in NII and increased provisioning, despite a fall in taxes and a rise in other income.

Net NPA ratio increases to 0.62% in 1QFY13 from 0.49% at the end of 1QFY12. Provision coverage continues to be strong at 79.7%, however this came in lower than the 81.9% levels seen last year.

Standalone performance snapshot

Rs (m)

1QFY12

1QFY13

Change

Income from operations

14,657

15,036

2.6%

Interest Expense

5,733

6,209

8.3%

Net Interest Income

8,924

8,827

-1.1%

Net interest margin (%)

7.6%

7.4%

Other Income

20

63

207.4%

Other Expense

1,984

2,091

5.4%

Provisions and contingencies

1,761

2,038

15.8%

Profit before tax

5,200

4,761

-8.4%

Tax

1,727

1,543

-10.7%

Profit after tax/ (loss)

3,473

3,219

-7.3%

Net profit margin (%)

23.7%

21.4%

No. of shares (m)

226.3

Book value per share (Rs)

277.5

P/BV (x)*

2.0

*Book value as on 30th June 2012

What has driven performance in 1QFY13?

The country's largest NBFC in terms of asset size, Shriram Transport Finance continued to maintain its stronghold over financing used vehicles. However, it faced some pressure on account of the rising interest rate environment. Its NIMs declined by 0.4% on a YoY basis but this was at least 3-4% higher than that of the best performing banks. It plans to maintain its NIMs between 7-8% for the year. The institution posted a return on equity of 20.9%, which is much lower than the 27.4% seen at the end of 1QFY12 on account of a drop on profits.

Demand for loans against new commercial vehicles (CVs) fell on account of the elevated interest rate cycle and falling IIP (Index of Industrial Production) growth numbers. STFC managed to grow its overall disbursements by 12% YoY in 1QFY13. Preowned vehicle however was strong with the company seeing a 17.8% YoY growth in these disbursements. Even on a QoQ basis, preowned vehicle disbursements were up 9.7%. This was mainly on account of the thrust into the rural market. The company started around 200 new rural centers and acquired nearly 12,000 new customers as a result. It plans to start around 200 more rural centers going forward, in a bid to concentrate on its niche segment, which will also help improve its yields.

The company continued to be conservative, preferring a lower loan-to-value (LTV) ratio for its customers. It will re-visit the same only when it sees some improvement in the business environment. It believes that there will be a reasonably good demand in the second half of this year. The management also expects the monsoon to pick up in the second half of the year, and is confident, especially on the used vehicles demand side, especially since frieght rates and demand for the same continues to be good. The company's assets under management (AUM) in terms of new and pre-owned vehicles were re-balanced with older vehicles enjoying a larger composition. The growth in AUM was around 13% on a YoY basis.

Standalone performance snapshot

(Rs m)

1QFY12

% of total

1QFY13

% of total

Change

Truck receivables

221,274

253,431

14.5%

Disbursements

47,842

53,692

12.2%

New CVs

10,752

22.5%

9,994

18.6%

-7.1%

Pre-owned CVs

37,090

77.5%

43,699

81.4%

17.8%

With STFC's borrowing profile largely tilted in favour of banks, the institution derived 76% of its funds from banks in 1QFY13 as against 76.4% in 1QFY12. However, with the base rate regime now in place, the company faced some pressure in terms of interest costs as borrowings were more expensive. The company is in the process of issuing Secured Non Convertible Debentures (NCDs) of face value of Rs 1,000 each, aggregating to Rs 3 bn with an option to retain over-subscription up to Rs 3 bn, for a total of Rs 6 bn. The company also securitizes its assets, and is thus able to raise cheaper funds. The new securitization guidelines are in favour of Shriram Transport, and it should be able to continue the activity unabated. This should pick up in the latter half of FY13.

STFC's cost to income ratio remained benign at 24% in 1QFY13 (22% in 1QFY12) due to its superior operating leverage. The company stands well capitalized with its capital adequacy in excess of 21.3% at the end of 1QFY13 (23.4% in 1QFY12). This will enable it to sustain its loan growth in the medium term.

What to expect?

At the current price of Rs 555, the stock is valued at 2 times its June 2012 book value. The company has put up a decent show despite the various uncertainties in the macro environment. It has also renewed its focus on its niche of pre-owned vehicles and is concentrating on the rural market, which continues to be robust. It also wants to focus on yield management, and its older vehicle portfolio in order to maintain its NIMs at around 7-8% range. The company has also been conservative in fresh lending on account of uncertainties in the environment and has reduced its loan to value ratio to by 5-10% to 65%.

STFC expects growth to take off in the second half of FY13 as a number of roads and infra projects will be coming on stream. It also expects monsoon to improve by then. Securitization guidelines are also in its favour, and it expects the same to pick up towards the end of the year. STFC is the biggest supplier of such securitized priority sector lending (PSL) paper, and for foreign banks as well as private sector banks to meet their PSL targets, they usually turn to players like Shriram. We continue to maintain our 'BUY' view on the stock from a 2-3 year perspective.

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